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Managing Interest Rate Risk: GAP and Earnings Sensitivity: Bank Management
Managing Interest Rate Risk: GAP and Earnings Sensitivity: Bank Management
Chapter 5
William Chittenden edited and updated the PowerPoint slides for this edition.
Interest Rate Risk
Example:
A bank makes a $10,000 four-year car
loan to a customer at fixed rate of
8.5%. The bank initially funds the car
loan with a one-year $10,000 CD at a
cost of 4.5%. The bank’s initial spread
is 4%.
4 year Car Loan 8.50%
1 Year CD 4.50%
4.00%
What is the bank’s risk?
Measuring Interest Rate Risk with GAP
GAP Summary
Change in Change in Change in Change in
GAP Interest Interest Interest Net Interest
Income Income Expense Income
Positive Increase Increase > Increase Increase
Positive Decrease Decrease > Decrease Decrease
interest rates.
The purpose is to assess what factors
influence shifts in net interest income over
time.
Measuring Interest Rate Risk: Synovus
3.00
1 3 5 7 9 11 13 15 17 19 21 23
Time (month)
Most LikelyForecast and Rate Ramps Dec. 2005
6
5
t
n4
e
c
r3
e
P
2
0
11 1 3 5 7 9 11 1 3 5 7 9 12
2006 2007
1.0
Sensitivity of Earnings: Year One
.5
Earnings sensitivity over one and
2
two years versus most likely rate
2
(.5)
ALCO Guideline
(1.0)
scenario
Board Limit
(1.5)
(2.0)
(2.5)
(3.0)
- 300 -200 -100 ML +100 +200 +300
Ramped Change in Rates from Most Likely (Basis Points)
Earnings Sensitivity Analysis Results
greater is risk
Income Statement GAP
Loans
Fixed Rate $5,661 100% $5,661 $5,661 100% $5,661
Floating Rate 3,678 100% 3,678 3,678 100% 3,678
Securities
Principal Cash Flows
Agencies 200 71% 142 200 71% 142
Agy Callables 2,940 71% 2,087 300 60% 180
CMO Fixed 315 58% 183 41 51% 21
Fed Funds Sold 2,700 96% 2,592 2,700 96% 2,592
Floating Rate
Total Rate-Sensitive Assets $15,494 $14,343 $12,580 $12,274
Rate-Sensitive Liabilities
Savings $1,925 75% $1,444 $1,925 5% $96
Money Mkt Accts 11,001 60% 6,601 11,001 40% 4,400
NOW 2,196 80% 1,757 2,196 20% 439
Fed Funds Purch/Repo 0 96% 0 0 96% 0
CDs - IOOM 3,468 85% 2,948 3,468 85% 2,948
CDs < 100M 4,370 84% 3,671 4,370 84% 3,671
Total Rate-Sensitive $22,960 $16,420 $22,960 $11,554
Liabilities
Rate Sensitivity Gap (Assets- ($7,466) ($2,077) ($10,380) $719
Liab)
Total Assets $29,909 $29,909 $29,909 $29,909
GAP as a Percent of Total -24.96% -6.94% -34.71% 2.40%
Assets
Change in Net Interest ($20.8) $7.2
Change in Net Interest 0.07% 0.02%
Net Interest Margin 5.20% 5.20%
Percentage Change in Net 1.34% 0.46%
Managing the GAP and Earnings Sensitivity
Risk
Steps to reduce risk
Calculate periodic GAPs over short
time intervals.
Fund repriceable assets with matching
repriceable liabilities so that periodic
GAPs approach zero.
Fund long-term assets with matching
noninterest-bearing liabilities.
Use off-balance sheet transactions to
hedge.
Adjust the Effective Rate Sensitivity of a
Bank’s Assets and Liabilities
Objective Approaches
Buy longer-term securities.
Reduce asset
Lengthen the maturities of loans.
sensitivity
Move from floating-rate loans to term loans.
Chapter 5
William Chittenden edited and updated the PowerPoint slides for this edition.